High compensation called warning sign of too much power, too little oversight

Sumner Redstone, chairman and chief executive officer of Viacom Inc., received total direct compensation of $58.6 million in salary, bonuses and other cash compensation and new equity awards last year, according to Aon Consulting's eComp database.

That placed the longtime media magnate among the country's highest-paid CEOs.

But the three-year total shareholder return of Viacom stock certainly didn't correspond to that. It was a negative 15 percent, according to Bloomberg. Meanwhile, its one-year total shareholder return was a negative 15.7 percent.

"Little value has been added to Viacom over the past year, and the continued massive bonuses meted out to Redstone and other company executives have no justification in real growth for its stockholders," said Paul Hodgson, senior research associate for The Corporate Library research and watchdog group in Portland, Maine. "If you want to hold a stock in the entertainment industry, I sure wouldn't hold Viacom."

The company defends Redstone's pay package.

"The criteria for compensation is based on financial performance, which was exceptional in 2004," said a Viacom spokesman. "We can't control the price of our stock."

Experts say that high compensation can be a sign of weak corporate governance--a warning sign that CEOs wield too much power without the proper checks to ensure high-quality company performance.

The leader of the CEO compensation pack in 2004 was Terry Semel of Yahoo Inc., who received total direct compensation of $144.8 million.

Unlike Viacom, Yahoo's three-year shareholder return was a robust 324.8 percent. Its one-year total return was 67.3 percent and its stock remains a Wall Street darling.

But is even a good year worth paying a CEO $144.8 million?

Some who fully acknowledge that Semel revived that search engine company have their doubts. They see a board with a runaway compensation committee.

"We made a recommendation against electing the compensation committee members on Yahoo's board at its shareholder meeting several weeks ago," said Patrick McGurn, executive vice president at Institutional Shareholder Services, a shareholder proxy advisory firm in Rockville, Md. "Nearly 20 percent of Yahoo shareholders withheld their vote--basically a vote against the committee members--to protest the compensation practices."

For such a strong-performing company, that tally was noteworthy because shareholders usually have no complaints when their stock has gone up.

The best way for a shareholder to take a stand against executive pay that's overly generous or not correlated to performance is to withhold votes from board members on the compensation committee and hold them directly responsible, McGurn said.

So far, that's a symbolic protest--directors usually are re-elected with one vote--but some big investors are out to change that.

"The shareholder proposal currently making the rounds with relatively strong support would require that directors receive support from a majority of shareholders, not just a plurality as is now the case," said Carol Bowie, director of governance research for the Investor Responsibility Research Center, an independent research organization in Washington, D.C.

While recent pressure had been for independent board members, accountability has now been added, Bowie said. Those directors represent shareholders when they negotiate executive pay packages.

Carefully examine the compensation of top executives of any company whose stock you're considering. The average CEO makes an estimated 300 times more than the average worker, compared with 42 times the average worker's salary 25 years ago. The average CEO of a major company received a double-digit compensation increase last year, while workers barely kept up with inflation at 2.2 percent, according to AFL-CIO compensation expert Brandon Rees.

Change may be under way.

"Compensation committees are applying a much higher level of scrutiny to corporate executives than in the past, though we have some distance to go," said Michael Savage, senior vice president with Aon Consulting, which specializes in executive compensation and provided data in this report. "They're looking at retirement packages, severance packages, corporate jets and other perks and benefits to determine whether they're appropriate for what must be paid to retain those executives."

There is greater disclosure of executive perks, noted Savage. The Securities and Exchange Commission continues to review the area, and we can expect additional rules regarding transparency.

There are many ways to compute total compensation, which is why lists often differ. Aon Consulting's eComp database, employing the Black Scholes method of valuing options, includes salary, annual incentives and value of long-term awards and equity grants. It does not include realized value of exercised options.